Who would have imagined that something worth less than one cent in 2009 would become the most sought-after thing on the planet? Blockchain technology owes its name and fame to cryptocurrencies like Bitcoin, Dogecoin and Ethereum. The emerging fanaticism behind cryptocurrencies has forced international economic and financial organizations to explore the possibilities of creating CBDC or Central Bank Digital Currency.
The only digital currencies independent of any central regulatory authority are Bitcoin, Ethereum, Litecoin, Bitcoin Cash, Stellar, and Dogecoin. Mining is altogether different, but the ease of trading cryptos attracts masses to trade; thus, institutions like Unbanked are becoming a part of the picture.
Why is everyone talking about digital currency?
As per a Bank of International Settlements report, 86% of national banks are now open to debate about the future of opening their coveted gates for independent and regulated digital currencies.
This happened because of a chain of events like: –
- Price hike of 3200% within three months in 2011 which is growing since then
- Adoption in payments by payment platforms like PayPal
- Inflation leading to decreasing the purchasing power of the U.S. Dollar
- Investments by trusted brands like Tesla, Microstrategy, and Walmart
- It follows a stock to flow ration method like gold and silver to control mining
- Halving every four years will lead to the last coin to be mined in 2140. It is not going anywhere anytime soon.
Cryptocurrencies were at the centre stage of discussions led by the World Economic Forum at Davos. However, finance experts were sceptical about people investments are there was no tangible assurance behind cryptocurrencies.
Trying and testing
This has not deterred companies like Uber and Mastercard to test the waters. Uber is contemplating updating its mode of payment to accept payments in cryptocurrencies. Mastercard’s Executive V.P. has made his stand clear. He wants Mastercard holders to have a choice of opting between traditional currency or Digital currency.
Supporters of Bitcoin and other cryptocurrencies claim that these financial platforms are inherently trustless systems – that is, they’re not directly tied to any nation-state, government, or body. They would argue that cryptocurrency is superior to traditional physical currencies because it is not dependent on, for instance, the U.S. federal government.
RBC Capital Markets is an investment bank based in Canada. It speculates the integration of cryptocurrencies into the Apple wallet. Mitch Steves, an analyst at the bank, says that Apple could generate its quarterly revenues in billions through this integration.
From volatile to stable
Joseph Grundfest is a notable academician and professor at the prestigious Stanford Law
School. He disowns the popular belief that cryptocurrencies at entirely trustless. It means that they are not entirely independent.
States and companies can influence the prices of cryptocurrencies. For instance, the prices of bitcoin surged after Tesla bought bitcoins worth 1.5 billion Us dollars. They slumped when he tweeted about carbon emissions from mining bitcoin.
In a historic move, El Salvador has passed a resolution to recognize bitcoin as a legal tender in their country. Now, people can trade with bitcoins like traditional fiat money colon and U.S. dollar in El Salvador.
A hybrid like Stable Coin may be the answer
Stable Coins are cryptocurrencies, but they may be backed by fiat money, commodities like gold and silver, or the price of other cryptocurrencies. Their value changes with the prices of asset that backs them. But they are a little safer as their prices can never tumble below the underlying asset price.
Professor Grundfest sees them as hoodwinking the existing system and creating something that already exists. Stable coins are susceptible to fraud as they cannot be audited or traced as traditional currencies. However, the Bank of International Settlements has identified certain advantages to Stablecoins such as: –
- It can be enhanced to make it anti-money laundering
- Data protection of customers
- Resilience in operations
- Financial Inclusion
- Tax compliance is easy
- Enhanced cybersecurity
Stable coins and other cryptocurrencies may have their risks, but their advantages overshadow the risks. They are beneficial for people who live in politically and economically unstable countries. Instead of investing in national bonds, they can prefer investing in cryptocurrencies.
Other countries like China, the Bahamas, and UAE are working on integrating their economy with CBDCs. The Bahamas is pioneering the Bahamas Sand dollar Project. Under project Digital Yuan, China has arranged a lottery where people can win CBDC for free and spend them. UAE and China are working conjointly to align their economies with CBDC for inter-state transfers.
Digital currencies would save the world from the notoriety of traditional monies by facilitating Faster payments and lesser costs on international transfers. The Head of Sidley’s Fintech and blockchain group, Lilya Tessler, is positive about the conversion of the digital economy in the near future. Now, we will just have to wait and watch how things unfold.